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4 Ways GST Will Impact The Mutual Fund Industry

Apr 19, 2017

Passing the bill on the Goods and Services Tax (GST) is considered a revolutionary step in the direction of aligning Indian taxation system with globally-compliant practices. The GST is likely to improve tax compliance, and consequently, tax revenue as well.

But the impact of GST won't uniformly affect industries and consumers. While manufactured goods are expected to become cheaper, services are likely to get dearer. Moreover, the ambit of services taxed will also go up.

And what impact will GST have on the mutual fund industry?

A negative one.

Securities transactions will become expensive: At present, the transactions on securities are excluded from the purview of Value Added Tax (VAT) and Service Tax. The GST regime is likely to change this practice and the delivery of securities would attract tax.

Compliance burden of mutual funds will go up substantially: As per the model of GST code, a tax incidence arises at the location where a service is being delivered. Besides this, the model law considers the head office of the Asset Management Company (AMC) and its branches different entities. The asset management activity of a fund house is usually centrally operated, while marketing and sales activities of the schemes run at various places. The problem arises when branches and the head office are treated as different entities. It is also unwise to treat transactions between the head office and the branches as "supply" of services.

Investors will suffer once the GST is implemented: If you think only spenders will pay more for services, you are probably misinformed. Once the GST is implemented, you, as investors, will shell out higher sums/premiums to invest in mutual funds. So don't be surprised if mutual fund houses subsequently raise the expense ratios under most of their schemes. These not only provide fund management services, but in this effort, they utilise services of other entities such as custodians and brokerage houses. As a result, the expense ratio of the scheme you have invested in includes the Service tax that the Asset Management Companies (AMCs) pay.

Mutual fund advice will also cost you more: GST will also negatively affect distributors: With the service tax rate mounting under GST, advice from an investment adviser / financial planner / financial guardian (who are liable to pay service tax on account of the provisions) will also get dearer. If investors opt for arbitrary recommendations from mutual fund distributors who earn commissions from mutual fund houses, it could possibly hurt this category of financial professionals.

Don't bother too much about the expense ratio...

PersonalFN is of the view that, although the expense ratio is an important consideration when selecting a fund for your portfolio, a smart investor would focus more on the fundamental attributes of the scheme. Do not compromise on the quality of the schemes simply because they are cheap. If the fund houses can justify the higher expense ratio by generating superior returns and providing prompt services, investors won't necessarily mind the hike, which may be nominal in nature.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

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